Asset-Backed Securities (ABS) issuance remains about dead. Year-to-date total
US ABS issuance of $2.9bn (tallied by JPMorgan's Christopher Flanagan) is a
fraction of the $31.5bn for comparable 2008. There has been no home equity
ABS issuance in months. Year-to-date CDO issuance remains less than $1.0bn.

Total Commercial Paper outstanding added $3.3bn this past week to $1.524 TN.
CP has declined $157bn y-t-d and $316bn over the past year (17.2%). Asset-backed
CP increased $1.7bn to $724bn, with a 52-wk decline of $90bn (11%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $364bn y-o-y, or 5.7%, to $6.716 TN. Reserves have declined
$231bn over the past 19 weeks.

Global Credit Market Dislocation Watch:

February 24 - Wall Street Journal (Gerald F. Seib): "When President Barack
Obama delivers his initial speech to Congress Tuesday night, a giant and unresolved
question will hang over the proceedings: What's the proper role for the government
in today's troubled economy? In fact, this is the megaquestion of our time.
Yet it is increasingly clear that neither the lawmakers the president will
be addressing, nor the nation beyond them, have come close to consensus on
an answer. Look up and down Pennsylvania Avenue this week and you can see how
the issue is dividing not just the two political parties, but factions within
them."

February 23 - Bloomberg (Walid el-Gabry): "Billionaire investor George Soros
said the current economic upheaval has its roots in the financial deregulation
of the 1980s and signals the end of a free-market model that has since dominated
capitalist countries... The global recession, triggered by the collapse of
the U.S. housing market, has 'damaged the financial system itself,' he said.
Regulators are in part to blame because they 'abrogated' their responsibilities,
Soros.. said. 'We're in a crisis I think that's really the most serious since
the 1930s and is different from all the other crises we have experienced in
our lifetime,' Soros said."

February 26 - New York Times (Eric Lipton): "The federal government's bank
insurance fund dropped by the end of last year to the lowest point in more
than 25 years, and the number of banks at risk of failure nearly doubled...
'There is no question this is one of the most difficult periods we have encountered
during the F.D.I.C.'s 75 years of operation,' Sheila Bair, the [FDIC's] chairwoman,
said... Overall, the nation's banks lost $26.2 billion in the fourth quarter,
the biggest quarterly lost since the F.D.I.C. began collecting data on quarterly
earnings. Almost one in three banks lost money... Ms. Bair said that the agency
had placed 252 institutions on its watch list -- meaning they were at risk
of failure -- compared to 76 banks at the end of 2007. With all of the bank
failures, the F.D.I.C.'s insurance fund has dropped to $19 billion... The insurance
fund had $52 billion at the end of 2007."

February 27 - USA Today (Sue Kirchhoff): "U.S. banks reported a net loss of
$26.2 billion in the final quarter of 2008 -- the worst performance since 1990
-- as the number of troubled institutions climbed. Fully 252 commercial banks
and savings institutions, with total assets of $159 billion, were termed problem
banks at the end of last year, 'overwhelmed' by staggering real estate losses
and the faltering economy, the Federal Deposit Insurance Corp. said..."

February 26 - Bloomberg (Margaret Chadbourn and Alison Vekshin): "U.S. savings
and loans reported a record $13.4 billion loss last year as they set aside
more funds for loan losses amid the recession and worsening financial crisis..."

February 23 - Bloomberg (Gonzalo Vina): "Chancellor of the Exchequer Alistair
Darling ordered Northern Rock Plc to expand lending by 14 billion pounds ($20
billion), the first in a series of measures due this week to revive the U.K.
banking industry. 'This is against a background where a lot of the foreign-
based banks have withdrawn' from Britain, Darling told BBC Radio 4... 'What
I want to do here is use Northern Rock to help fill that gap.'"

February 26 - Bloomberg (Jeff Green and Alex Ortolani): "General Motors Corp.,
surviving on $13.4 billion in U.S. aid, reported a $9.6 billion fourth-quarter
loss... GM posted an annual loss of $30.9 billion, the second largest in its
100-year history."

February 26 - Bloomberg (Jon Menon): "Royal Bank of Scotland Group Plc will
put 325 billion pounds ($462 billion) of investments into a state insurance
program and shift toxic assets to a new unit after posting the biggest loss
in British history."

February 27 - Bloomberg (Balazs Penz and Agnes Lovasz): "Hungarian Prime Minister
Ferenc Gyurcsany wants the European Union to arrange a package of as much as
180 billion euros ($230 billion) to help east European economies, banks and
companies weather the financial crisis."

February 25 - Bloomberg (Daryna Krasnolutska): "Ukraine's credit rating was
cut two levels by Standard & Poor's, a day after Latvia was downgraded
to junk, because political turmoil poses growing risks to the country's International
Monetary Fund loan."

Currency Watch:

The dollar index ended the week up 1.8% to 88.01 (up 8.2% y-t-d). For the
week on the upside, the South African rand increased 0.4%. On the downside,
the Japanese yen declined 4.3%, the Norwegian krone 3.2%, the Swedish krona
3.1%, the Mexican peso 3.1%, the New Zealand dollar 2.1%, the South Korean
won 1.8%, the Canadian dollar 1.6%, the Danish krone 1.3%, the Euro 1.3%, and
the Swiss franc 1.3%.

February 24 - Bloomberg (Belinda Cao): "China's insurance regulator plans
to allow insurers to buy unsecured corporate notes for the first time to spur
economic growth and development of the debt market..."

February 25 - Bloomberg (Zhang Dingmin and Luo Jun): "China aims to prevent
a 'massive rebound' in non-performing loans, even as the world's financial
crisis deepens, the nation's top banking regulator said. The non-performing
loan ratio at Chinese banks fell to 2.45% at the end of December, from 6.17%
a year earlier..."

February 27 - Bloomberg (Li Yanping): "China plans to hand out 20 billion
yuan ($2.9 billion) of subsidies this year for farmers' home- appliance purchases
as the government tries to drive up consumption to revive the world's third-biggest
economy."

February 26 - Bloomberg (Nipa Piboontanasawat): "Hong Kong's exports plunged
by the most in 50 years... Shipments fell 21.8% in January from a year earlier..."

Japan Watch:

February 27 - Bloomberg (Jason Clenfield and Toru Fujioka): "Japan headed
for its worst postwar recession in January as manufacturers cut production
by an unprecedented 10% and consumers slashed spending."

February 25 - Bloomberg (Jason Clenfield): "Japan's exports plunged 45.7%
in January from a year earlier, resulting in a record trade deficit... The
shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980...
The drop in shipments abroad eclipsed a record 35% decline set the previous
month."

India Watch:

February 27 - Bloomberg (Cherian Thomas): "India's economy grew at the slowest
pace since 2003 last quarter... Asia's third-largest economy expanded 5.3%
in the three months to Dec. 31..."

February 24 - Bloomberg (Kartik Goyal and Cherian Thomas): "India reduced
excise and service tax to revive economic growth, less than an hour after Standard & Poor's
said the nation's credit rating may be cut to junk as government debt is reaching
a level that's "not sustainable.'"

February 24 - Bloomberg (Cherian Thomas): "India's credit rating may be cut
to junk by Standard & Poor's, which said government spending plans to help
shield the economy from the global recession and win voter support in elections
were 'not sustainable.'"

Asia Reflation Watch:

February 27 - Bloomberg (Kim Kyoungwha): "South Korea's won tumbled to the
lowest level in 11 years on concern sliding exports will curb the supply of
dollars and hinder the ability of local banks and companies to repay overseas
debt."

February 24 - Bloomberg (Yu-huay Sun and Janet Ong): "Taiwan's export orders
dropped by a record in January... Orders fell 41.67% from a year earlier after
December's 33% plunge..."

February 26 - Bloomberg (Shamim Adam): "Singapore's economy shrank the most
in at least 33 years last quarter... Gross domestic product declined an annualized
16.4% last quarter from the previous three months..."

Latin America Watch:

February 23 - Bloomberg (Jens Erik Gould): "Mexican retail sales declined
in December at the sharpest pace in more than six ... Retail sales dropped
3.3% from the same month a year earlier..."

Central Banker Watch:

February 26 - Bloomberg (Reed Landberg): "Bank of England Governor Mervyn
King said he's ready to act to increase the supply of money to bolster the
U.K. economy. 'The amount of money in the economy is growing too slowly,' King
told lawmakers... He said he expected the government to give him the authority
to boost money supply over 'the next few months.'"

Fiscal Watch:

February 26 - Associated Press (Martin Crutsinger): "Pledging 'a new era of
responsibility,' President Barack Obama unveiled a multi-trillion-dollar spending
plan Thursday that would boost taxes on the wealthy, curtail Medicare, lay
the groundwork for universal health care and leave a string of deficits dwarfing
any in the nation's history. In addition to sending Congress his $3.55 trillion
budget plan for 2010, Obama proposed more immediate changes that would push
spending to $3.94 trillion in the current year. That would result in a record
deficit Obama projects will hit $1.75 trillion, reflecting the massive spending
being undertaken to battle a severe recession and the worst financial crisis
in seven decades."

February 27 - Bloomberg (Gabrielle Coppola and Jody Shenn): "The Federal Deposit
Insurance Corp. plans to back new debt sold by banks that would later convert
into common shares in an expansion of its Temporary Liquidity Guarantee Program."

February 27 - Bloomberg (Theophilos Argitis): "Canada recorded its first current
account deficit in almost a decade in the fourth quarter as exports and profits
that companies earned abroad fell."

February 25 - Bloomberg (Jana Randow): "German exports slumped in the fourth
quarter, causing Europe's largest economy to contract the most in 22 years.
Exports dropped 7.3% from the previous quarter..."

February 24 - Bloomberg (Gabi Thesing): "German business confidence dropped
to a 26-year low in February as the worst recession since World War II prompted
companies to curb production and lay off workers."

February 25 - Financial Times (Charles Clover): "Russia's economy contracted
at an annual rate of 8.8% in January, according to the economy minister."

February 23 - Bloomberg (Aaron Eglitis): "Latvia, Estonia and Lithuania, facing
a prolonged recession, say they will protect their currency pegs whatever the
cost. That strategy may be as crippling as the alternative, economists say.
The three-nation Baltic region is in its deepest crisis since breaking from
the Soviet Union in 1991..."

Bursting Bubble Economy Watch:

February 27 - Bloomberg (Timothy R. Homan): "The U.S. economy shrank in the
fourth quarter at a faster pace than previously estimated as consumer spending
plunged, companies cut inventories and exports sank. Gross domestic product
contracted at a 6.2% annual pace from October through December..."

February 24 - Bloomberg (Aliza Marcus): "Health-care spending in the U.S.
this year will grow 5.5%, the least since 1997... The projected increase, to
$2.5 trillion, compares with annual gains of 6.1% in 2008 and 2007... The calculations
include stepped-up government spending to cover more elderly and poor through
programs such as Medicare and Medicaid..."

February 24 - Wall Street Journal (Richard Gibson): "The recession is bruising
businesses across the franchising industry. From ice-cream parlors to tanning
salons, franchisees' defaults on loans guaranteed by the U.S. Small Business
Administration are piling up in amounts unseen in years. A list of loans at
500 franchises shows the number of defaults by franchisees increased 52% in
the fiscal year ended Sept. 30, 2008, from fiscal 2007."

February 26 - Dow Jones: "The National Football League has cut its administrative
staff by 15%, or 169 positions, and frozen all salaries, including that of
commissioner Roger Goodell..."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

February 24 - Bloomberg (Timothy R. Homan and Courtney Schlisserman): "Home
prices in 20 U.S. cities declined 18.5% in December from a year earlier, the
fastest drop on record..."

February 26 - Bloomberg (David M. Levitt): "Office building sales in the U.S.
fell in January to the lowest since at least 2000... About $744.6 million in
office property sold last month, an 86% drop from a year earlier."

GSE Watch:

February 26 - Bloomberg (Dawn Kopecki): "Fannie Mae, the mortgage-finance
company seized by regulators in September, asked the U.S. Treasury for $15.2
billion in capital and raised the possibility of requesting more aid after
a sixth consecutive quarterly loss drove its net worth below zero. A wider
fourth-quarter net loss of $25.2 billion... pushed the company to make its
first draw from a $200 billion federal lifeline... Credit quality deteriorated
and debt costs soared, forcing the company to record higher expenses and write
down the value of its assets. 'We expect the market conditions that contributed
to our net loss for each quarter of 2008 to continue and possibly worsen in
2009, which is likely to cause further reductions in our net worth,' Fannie
said..."

Real Estate Bust Watch:

February 26 - Bloomberg (David M. Levitt): "New York's biggest banks and securities
firms may relinquish 8 million square feet of office space this year, deepening
the worst commercial property slump in more than a decade... JPMorgan Chase & Co.,
Citigroup Inc., bankrupt Lehman Brothers Holdings Inc. and industry rivals
have vacated 4.6 million feet, a figure that may climb by another 4 million
as businesses leave or sublet space they no longer need, according CB Richard
Ellis..."

February 22 - Crains NY (Amanda Fung): "Residents of a 54-unit Upper East
Side co-op got the bad news last month -- despite the board's intense efforts
to trim expenses, maintenance fees are rising 15%, nearly double last year's
hike. 'People are furious,' says Steven Sladkus, president of the co-op board...
It's an increasingly common problem. Even as the city's economy sinks, maintenance
fees and common charges for co-ops and condos, respectively, are rising at
the highest rates in years. Co-op managers blame soaring expenses, primarily
property taxes."

Muni Watch:

February 26 - Bloomberg (Jeremy R. Cooke): "CPS Energy, San Antonio's power
and gas utility, leads U.S. tax-exempt borrowers today as this year's sales
of fixed-rate municipal bonds pass the $40 billion mark a week sooner than
in 2008."

February 26 - Bloomberg (Daniel Taub): "California home sales doubled in January
from a year earlier as buyers took advantage of a 41% decline in the median
price of an existing home, the California Association of Realtors said... The
median price dropped to $254,350 from $427,200."

New York Watch:

February 25 - Bloomberg (Henry Goldman): "New York state's economy deteriorated
so rapidly that anticipated tax revenue declined by $1 billion since December...
The third-largest U.S. state faces a $14 billion gap in its $122.7 billion
budget for the fiscal year beginning April 1."

Crude Liquidity Watch:

February 24 - Bloomberg (Henry Meyer): "A $10 billion bailout from neighbor
Abu Dhabi threatens to cost Dubai its autonomy and the free- wheeling economic
system that helped establish it as the Middle East's main business hub."

February 26 - Bloomberg (Zainab Fattah): "Dubai rents reached 'unrealistic'
levels and are expected to fall as much as 40% in high-end areas this year
after the global financial crisis slowed a property boom in the Gulf business
hub, the head of Dubai's Real Estate Regulatory Authority said."

A Week of Big Numbers:

February 24 - Bloomberg (Mark Pittman and Bob Ivry): "...the U.S. government
has pledged more than $11.6 trillion on behalf of American taxpayers over the
past 19 months, according to data compiled by Bloomberg. Changes from the previous
table, published Feb. 9, include a $787 billion economic stimulus package.
The Federal Reserve has new lending commitments totaling $1.8 trillion. It
expanded the Term Asset-Backed Lending Facility, or TALF, by $800 billion to
$1 trillion and announced a $1 trillion Public-Private Investment Fund to buy
troubled assets from banks. The U.S. Treasury also added $200 billion to its
support commitment for Fannie Mae and Freddie Mac..."

The Administration's budget projects an astounding $1.75 TN fiscal 2009 federal
deficit - about 12% of GDP. Federal outlays are expected to surge 32% this
year to $3.94 TN. In nominal terms, the deficit is set to quadruple the previous
all-time record. In percentage terms one has to return back to the war economy
of the 1940s to find anything comparable.

Yesterday, Fannie Mae reported a fourth quarter loss of $25.2bn, bringing
the company's second-half 2008 shortfall to more than $50bn. Non-performing
assets surged a stunning 87% during the quarter to $119.2bn, a three-fold increase
in just 12 months. Having more than depleted its razor-thin capital base, Fannie
requested $15.2bn of additional Treasury support (from the $200bn promised).

The FDIC announced yesterday a $26.2bn Q4 2008 loss for the banking system.
The Office of Thrift Supervision reported that our nation's Savings & Loans
lost $3.0bn during the quarter, increasing 2008 losses to a record $13.4bn.
General Motors announced a $9.6bn Q4 loss, increasing its annual loss to a
staggering $30.9bn. Analysts are expecting even greater losses at AIG and Citigroup.

The dimensions of the reported deficits and losses are not easily digested;
the scope of the today's systemic problems not so easily comprehended. I'll
push ahead with efforts to use the Credit Bubble Framework as an analytical
tool for making some sense of the historic nature of the unfolding bust.

Let's try to place the various huge - and increasingly numbing - deficit/loss
numbers (attendant with this bust) into coherent context. For such an endeavor
it is imperative to first examine the preceding boom. This week, in particular,
seems an appropriate time to summarize, in Credit terms, the incredible dimensions
of the fateful inflationary Bubble.

From the Federal Reserve's "flow of funds" report, we can see that Total System
Credit (non-financial and financial) ended 1995 at $18.475 TN. By the end of
2007, this number had inflated to $49.882 TN, for growth of 170% in only 12
years. During this period, Household Debt swelled 184% to $8.959 TN; Non-farm
Corporate Debt 130% to $3.832 TN; and State & Local Government borrowings
109% to $2.192 TN. Federal debt expanded "only" 41% to $5.122 TN. Rest of World
holdings of U.S. assets inflated 365% to $16.048 TN. While significantly trailing
Credit growth, GDP nonetheless bulged 87% during this period.

Over the past decade, the "optimists" often cited the federal government's
positive fiscal position as evidence of the health of the overall economy and
soundness of our prosperity. It should be clear these days that the protracted
boom's massive inflation of private-sector Credit had grossly inflated government
receipts (among other things). Indeed, over the 12-year period Federal Receipts
inflated 88% (to $2.651 TN) and State & Local receipts increased 92% (to
$1.903bn). This crucial facet of the inflationary boom spurred federal and
state & local spending growth of 80% and 93%, respectively.

State & Local governments will now attempt to maintain these inflated
levels of expenditures, while the federal government will move aggressively
to grossly inflate already inflated spending. The budget now calls for federal
expenditures this year to approach $4.0 TN. This compares to spending of about
$1.6 TN back in 1995. The federal deficit is projected to expand by a combined
$3.0 TN during fiscal years '09 and '10. This would amount to a 60% increase
in federal debt in only two years.

Today's unparalleled expansion of federal debt and obligations is being dressed
up as textbook "Keynesian." It's rather obvious that we are in dire need of
some new books, curriculum and economic doctrine. But from a political perspective,
the title is appropriate enough. From an analytical framework perspective such
policymaking is more accurately labeled "inflationism" - a desperate attempt
to prop inflated asset prices, incomes, business revenues, government receipts
and economic "output". There have been many comparable sordid episodes throughout
history, and I am not aware of any positive outcomes.

The Administration's budget earmarks an additional $750 billion as a contingency
for added financial sector bailouts. Fed data nicely illuminate the dimensions
of the problem. Between 1996 and 2007, Total Mortgage Debt expanded 220% to
$10.061 TN. Total GSE Agency Securities (debt and MBS) tripled to $7.397 TN.
The ABS market inflated 580% to $4.50 TN. Over this 12-year period, Bank Assets
swelled 150% to $11.194 TN. Securities Broker/Dealer assets ballooned 440%
to $3.10 TN. In 12 years, Total Financial Sector debt expanded 300%, to $16.90
TN - in the process creating a Credit and liquidity junky out of U.S. asset
markets and the real economy. Today, the deeply impaired financial sector is
incapable of assuaging system Credit needs.

For perspective, a little compare and contrast is in order. Total Mortgage
Debt increased $188bn in 1995, compared to $1.437 TN growth in 2005, $1.410
TN in 2006, and $1.098 TN in 2007. Agency MBS increased $98bn in 1995, compared
to $609bn growth last year. The ABS market grew $127bn in 1995, in contrast
to the $725bn growth in 2005 and 2006's $808bn. Bank Credit expanded $273bn
in 1995, compared to 2007's $788bn. Broker/Dealer assets expanded $113bn in
1995, a small fraction of 2007's fateful $615bn growth.

This historic Credit-induced inflation of Household Incomes and Net Worth
was at the core of deep structural maladjustment to the U.S. "Bubble" economy.
The implosion of "Wall Street finance" (in particular the collapse of Broker/Dealer
financing, private-label MBS and other ABS, and various methods of leveraging
mortgages and other securities) marked the demise of various Bubbles, including
private-sector debt securities, residential and commercial real estate, equities,
and Household Net Worth more generally. In the final analysis, the bust has
left multi-Trillion dollar holes in various sector balance sheets. Moreover,
Patterns of Spending throughout the economy have been forever altered. Year-after-year
of reckless lending has quickly come home to roost.

Our federal government has commenced the process of trying to fill holes by
inflating government Credit and obligations (by the Trillions). Depending on
the reader's perspective, I risk appearing either the master of the obvious
or a rabid sensationalist. Yet the stakes associated with the current course
of fiscal and monetary policy are absolutely momentous. And I am compelled
to write that "if you're not confused you don't understand the nature of the
problem."

What are the ramifications and consequences associated with U.S. deficits
approaching 12% of GDP? Over the short and intermediate terms? Will unprecedented
fiscal and monetary measures stem financial sector implosion? Will Washington's
efforts work to bolster a faltering Bubble Economy, or will they instead only
tend to delay unavoidable structural adjustment? Will the Treasury market continue
to so easily accommodate reflationary efforts? How long will the dollar remain
relatively stable in the face of massive growth in U.S. Non-Productive Credit?
Will multi-Trillions of government debt and obligation expansion help to resuscitate
private-sector Credit creation - or will it instead simply destroy the Creditworthiness
of the entire economy?

Not uncharacteristically, I pose more questions than I have answers. But I
do fear that we now face Trillion dollar deficits as far as the eye can see.
I don't expect "Keynesian" policies to have much success in reinvigorating
busted asset markets. I'll be surprised if private-sector Credit creation bounces
back anytime soon. I fear policymaking will do more harm than good when it
comes to needed economic restructuring. And my worst fears of policymaking
(fiscal and monetary, democrat and republican, national and local) bankrupting
the country are being anything but allayed. Similar to my belief that mortgage
Credit growth should have been limited to, say, no more than 4 or 5% annually
during the boom, there is today a very serious need to incorporate some reasonable
limits on the expansion of federal debt and obligations.